86. Figure 10-3.
Bobick Company provided the following information for last year:
Operating income
$64,000
Sales
$200,000
Beginning operating assets
$387,000
Ending operating assets
$413,000
Refer to Figure 10-3. Bobick’s margin for last year was
87. Figure 10-3.
Bobick Company provided the following information for last year:
Operating income
$64,000
Sales
$200,000
Beginning operating assets
$387,000
Ending operating assets
$413,000
Refer to Figure 10-3. Bobick’s turnover ratio for last year was
88. Figure 10-3.
Bobick Company provided the following information for last year:
Operating income
$64,000
Sales
$200,000
Beginning operating assets
$387,000
Ending operating assets
$413,000
Refer to Figure 10-3. Bobick’s return on investment for last year was
89. Castor Company had income of $10,000, average assets of $100,000 and sales of $40,000. What is Castor’s
ROI?
90. Shandling Company had operating income of $70,000, sales of $218,750, and turnover of 0.5. What is
Shandling’s ROI?
91. Figure 10-4.
The manager of Alpha Division projects the following for next year:
Sales
$100,000
Operating income
$30,000
Operating assets
$200,000
The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional
income. The company’s minimum rate of return is 12%.
Refer to Figure 10-4. What is the residual income for Alpha Division without the additional investment?
92. Figure 10-4.
The manager of Alpha Division projects the following for next year:
Sales
$100,000
Operating income
$30,000
Operating assets
$200,000
The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional
income. The company’s minimum rate of return is 12%.
Refer to Figure 10-4. What is the residual income for Alpha Division with the additional project?
93. Figure 10-4.
The manager of Alpha Division projects the following for next year:
Sales
$100,000
Operating income
$30,000
Operating assets
$200,000
The manager can invest in an additional project that would require $30,000 investment in additional assets and would generate $4,200 of additional
income. The company’s minimum rate of return is 12%.
Refer to Figure 10-4. Which of the following statements is true?
94. Figure 10-5.
Huge, Inc. has many divisions that are evaluated on the basis of ROI. One division, Alpha, makes boxes. A
second division, Beta, makes candy and needs 50,000 boxes per year. Alpha incurs the following costs for one
box:
Direct materials
$0.20
Direct labor
0.70
Variable overhead
0.10
Fixed overhead
0.23
Total
$1.23
Alpha has capacity to make 500,000 boxes per year. Beta currently buys its boxes from an outside supplier for $1.40 each (the same price that Alpha
receives).
Refer to Figure 10-5. Assume that Huge, Inc., mandates that any transfers take place at full manufacturing cost. What would be the transfer price if
Alpha transferred boxes to Beta?
95. Figure 10-5.
Huge, Inc. has many divisions that are evaluated on the basis of ROI. One division, Alpha, makes boxes. A
second division, Beta, makes candy and needs 50,000 boxes per year. Alpha incurs the following costs for one
box:
Direct materials
$0.20
Direct labor
0.70
Variable overhead
0.10
Fixed overhead
0.23
Total
$1.23
Alpha has capacity to make 500,000 boxes per year. Beta currently buys its boxes from an outside supplier for $1.40 each (the same price that Alpha
receives).
Refer to Figure 10-5. Assume that Hugo, Inc., allows division managers to negotiate transfer price. Alpha is producing 400,000 boxes. If Alpha and
Beta agree to transfer boxes, what is the ceiling of the bargaining range and which division sets it?
96. Figure 10-5.
Huge, Inc. has many divisions that are evaluated on the basis of ROI. One division, Alpha, makes boxes. A
second division, Beta, makes candy and needs 50,000 boxes per year. Alpha incurs the following costs for one
box:
Direct materials
$0.20
Direct labor
0.70
Variable overhead
0.10
Fixed overhead
0.23
Total
$1.23
Alpha has capacity to make 500,000 boxes per year. Beta currently buys its boxes from an outside supplier for $1.40 each (the same price that Alpha
receives).
Refer to Figure 10-5. Assume that Hugo, Inc., allows division managers to negotiate transfer price. Alpha is producing 400,000 boxes. If Alpha and
Beta agree to transfer boxes, what is the floor of the bargaining range and which division sets it?
97. Figure 10-5.
Huge, Inc. has many divisions that are evaluated on the basis of ROI. One division, Alpha, makes boxes. A
second division, Beta, makes candy and needs 50,000 boxes per year. Alpha incurs the following costs for one
box:
Direct materials
$0.20
Direct labor
0.70
Variable overhead
0.10
Fixed overhead
0.23
Total
$1.23
Alpha has capacity to make 500,000 boxes per year. Beta currently buys its boxes from an outside supplier for $1.40 each (the same price that Alpha
receives).
Refer to Figure 10-5. Assume that Hugo, Inc., allows division managers to negotiate transfer price. Alpha is producing 500,000 boxes. If Alpha and
Beta agree to transfer boxes, what is the floor of the bargaining range and which division sets it?
98. Figure 10-6.
Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes a component, component X, that
is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players that use
component X and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one
unit of component X:
$0.30
0.15
0.70
1.00
$2.15
Sophistosand has capacity to make 400,000 units of component X per year, but due to a soft market, only plans to produce and sell 320,000 units next
year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives).
Refer to Figure 10-6. Assume that Giga-Stuff allows negotiated transfer pricing. What is the floor of the bargaining range and which division sets
it?
99. Figure 10-6.
Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes a component, component X, that
is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players that use
component X and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one
unit of component X:
$0.30
0.15
0.70
1.00
$2.15
Sophistosand has capacity to make 400,000 units of component X per year, but due to a soft market, only plans to produce and sell 320,000 units next
year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives).
Refer to Figure 10-6. Assume that Giga-Stuff allows negotiated transfer pricing. What is the ceiling of the bargaining range and which division sets
it?
100. Figure 10-6.
Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes a component, component X, that
is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players that use
component X and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one
unit of component X:
$0.30
0.15
0.70
1.00
$2.15
Sophistosand has capacity to make 400,000 units of component X per year, but due to a soft market, only plans to produce and sell 320,000 units next
year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives).
Refer to Figure 10-6. Assume that Sophistosand and Videostuff have agreed on a transfer price of $2.20. What are the total cost savings for
Videostuff?
101. Figure 10-6.
Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes a component, component X, that
is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players that use
component X and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one
unit of component X:
$0.30
0.15
0.70
1.00
$2.15
Sophistosand has capacity to make 400,000 units of component X per year, but due to a soft market, only plans to produce and sell 320,000 units next
year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives).
Refer to Figure 10-6. Assume that Sophistosand and Videostuff have agreed on a transfer price of $2.20. What is the total benefit for Sophistosand?
102. Figure 10-6.
Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes a component, component X, that
is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players that use
component X and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one
unit of component X:
$0.30
0.15
0.70
1.00
$2.15
Sophistosand has capacity to make 400,000 units of component X per year, but due to a soft market, only plans to produce and sell 320,000 units next
year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives).
Refer to Figure 10-6. Assume that Sophistosand and Videostuff have agreed on a transfer price of $2.20. What is the total benefit for Giga-Stuff,
Inc.?
103. Several transfer pricing policies are used in practice. These transfer pricing policies include:
104. Economic Value Added is residual income with the cost of capital equal to the firm’s
105. In calculating residual income, the variable set by top management is called the:
106. The calculation of Economic Value Added is:
107. Using Economic Value Added (EVA) to calculate residual income, the cost of capital employed is:
108. Select the appropriate definition for each of the items listed below.
2. The most common measure of performance for an
4. The dollar difference between operating income and
Residual
109. Match each term with the correct statement from below.
1. ___________ is the practice of delegating decision-
2. A ___________ is a responsibility center in which a
3. The manager of a ___________ is evaluated on the
investment
4. A ___________ is a responsibility center in which a
5. A ___________ is a responsibility center in which a
110. Pollux Company had the following income statement for last year:
Sales
$360,000
Less: Cost of goods sold
195,000
Gross profit
$165,000
Less: Selling & administrative expense
78,600
Operating income
$86,400
Beginning assets were $559,000 and ending assets were $593,000.
(Carry computations out to three decimal places.)
A. What are average operating assets?
B. What is margin?
C. What is turnover?
D. What is ROI?
111. The Southern Division of Jenkins Company had income of $48,300, average assets of $345,000 and sales
of $241,500. The minimum rate of return for Jenkins Company is 12%.
A. What is margin for the Southern Division?
B. What is turnover for the Southern Division?
C. What is ROI for the Southern Division?
D. What is residual income for the Southern Division?
112. Noble Company has two divisions, the Domestic Division and the International Division. Last year, the
Domestic Division earned $360,000 using average operating assets of $1,440,000. Sales for the Domestic
Division were $3,600,000. Last year, the International Division earned $560,000 using average operating assets
of $2,800,000. Sales for the International Division were $7,000,000.
A. For the Domestic Division, margin is __________________ Turnover is __________________ and ROI is
__________________.
B. For the International Division, margin is __________________ Turnover is __________________ and ROI
is __________________.
C. If these are the only two divisions of Noble Company, what is ROI for Noble Company?
113. Chase Company had the following income statement for last year:
Sales
$180,000
Less: COGS
97,500
Gross Profit
$ 82,500
Less: Selling & Admin. Expense
39,300
Operating income
$ 43,200
Beginning assets were $279,500 and ending assets were $296,500.
A. Average operating assets were $__________________.
B. Margin was __________________.
C. Turnover was __________________.
D. Return on investment was __________________%.
114. Red Earth Company has two divisions, the Okla Division and the Homa Division. Last year, the Okla
Division earned $60,500 using average operating assets of $550,000. Last year, the Homa Division earned
$260,000 using average operating assets of $2,000,000. Minimum required rate of return for Red Earth is 9
percent.
A. For the Okla Division, residual income is __________________.
B. For the Homa Division, residual income is __________________.
Now assume that the minimum required rate of return for Red Earth is 12 percent.
C. For the Okla Division, residual income is __________________.
D. For the Homa Division, residual income is __________________.
115. Paige Inc. has a division that makes paint and another division that constructs subdivision houses. The
paint division incurs the following costs for one gallon of paint:
Direct materials
$1.10
Direct labor
1.45
Variable overhead
0.90
Fixed overhead
1.15
Total
$4.60
The Paint Division can make 1,000,000 gallons per year, and is at capacity. The Construction Division currently buys its paint from an outside
supplier for $5.20 per gallon (the same price that the Paint Division receives).
A. The maximum transfer price per gallon of paint is $__________________; this price is set by which of the two divisions?
B. The minimum transfer price per gallon of paint is $__________________; this price is set by which of the two divisions?
116. Figure 10-7.
Paige Inc. has a division that makes paint and another division that constructs subdivisions. The paint division
incurs the following costs for one gallon of paint:
Direct materials
$1.10
Direct labor
1.45
Variable overhead
0.90
Fixed overhead
1.15
Total
$4.60
The Paint Division can make 1,000,000 gallons per year, and expects to produce 800,000 gallons next year. The construction division currently buys
200,000 gallons of paint from an outside supplier for $5.20 per gallon (the same price that the Paint Division receives).
A. The maximum transfer price per gallon of paint is $__________________.
B. The minimum transfer price per gallon of paint is $__________________.
C. Assume that the transfer takes place at $5 per gallon, calculate the amount by which each of the following will be better off with the transfer than
without it.
Paint Division $__________________
Construction Division $__________________
Paige, Inc., as a whole $__________________
117. Figure 10-7.
Paige Inc. has a division that makes paint and another division that constructs subdivisions. The paint division
incurs the following costs for one gallon of paint:
Direct materials
$1.10
Direct labor
1.45
Variable overhead
0.90
Fixed overhead
1.15
Total
$4.60
The Paint Division can make 1,000,000 gallons per year, and expects to produce 1,000,000 gallons next year. The construction division currently
buys 200,000 gallons of paint from an outside supplier for $5.20 per gallon (the same price that the Paint Division receives).
A. The maximum transfer price per gallon of paint is $__________________.
B. The minimum transfer price per gallon of paint is $__________________.
C. Does it matter whether or not the two divisions transfer?
118. Describe the four perspectives of the Balanced Scorecard.
119. The Glass Division of a company makes glass vases which have the following unit costs:
Direct materials
$0.20
Direct labor
0.35
Variable overhead
0.15
Fixed overhead
1.30
Selling commission
0.50
120. How is EVA (Economic Value Added) different from standard residual income calculations?
121. What are the advantages and disadvantages of return on investment (ROI)?
122. What is the difference between absorption-costing income and variable-costing income?